Layoffs 'going to get worse from here,' Charles Schwab's Liz Ann Sonders says

Charles Schwab Chief Investment Strategist Liz Ann Sonders joins Yahoo Finance anchors Brian Sozzi, Julie Hyman, and Brad Smith to discuss market uncertainty, Fed policy, recession indicators, tech industry layoffs, and the outlook for the labor market.

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BRAD SMITH: Recession fears continue to mount and leading indicators are pointing toward further economic weakness. But what would be the tipping point that actually pushes the US into a recession? Great question you ask.

Joining us now to break that down is Liz Ann Sonders, the chief investment strategist over at Charles Schwab. Liz Ann, great to see you this morning. Thanks for taking the time as always.

LIZ ANN SONDERS: Thanks for having me.

BRAD SMITH: Particularly within your 2023 outlook, I was particularly interested within this-- that you've described as a rolling recession or a recession of the rolling variety. Perhaps you can break that down for us.

LIZ ANN SONDERS: Yeah, and that's unique to the COVID cycle. So if you think about the point at which stimulus kicked in, you had this pent-up demand. But because we were still in some form of lockdown, all that demand was forced to be funneled into the goods side of the economy. That then became the breeding ground for the inflation problem we're still dealing with.

But since then, a good chunk of the good side of the economy, including housing and many things housing related, some tech areas, some consumer areas, have gone into what could be defined as recession. You're now in disinflation if not deflation in those inflation-- goods inflation categories.

But we've then subsequently had the pent-up demand on the services side. That's where the inflation is most sticky at this point. And I think because services employs more than the goods side of the economy, that helps to explain why the labor market has been relatively resilient. So that's the nature of a rolling recession.

JULIE HYMAN: And, you know, I know we've talked about this a little bit before, Liz Ann, but we all know things are slowing. There's all this debate about whether we're in a recession, whether it's gonna be this rolling recession that you describe or not. Why does it matter from a consumer and an investment perspective, if it is technically a recession? Or does it matter? Is it just the sort of slowing that's the important part?

LIZ ANN SONDERS: I think if we were having this conversation a year ago and we were just off all-time highs in equity indices, I would say it would matter a lot. But at the October lows, S&P was down 35%. Whether it's ultimately declared an actual recession by the NBER, which always comes, you know, well after the peak in economic activity, I'm not-- it's almost more academic at this point.

That said, I think there's the feeders into the consumer confidence side of things, as well as consumption. And that's more a function, I think, of if we start to see more headline deterioration in the labor market. That's when I think the pinch will be felt a bit more. I'm not sure it has as many implications for the equity market from here, given the bear market that's been already underway for more than a year.

BRIAN SOZZI: Liz Ann, how concerned are you about what appears to be the spreading of these layoff announcements? It started in tech. But you got news today out of 3M saying they're laying out 20-- laying off 2,500 people in the manufacturing sector because of slowing demand. How concerned are you about that?

LIZ ANN SONDERS: I think it's going to get worse from here. Every leading indicator suggests that the labor market will weaken. In addition, you've got the Fed essentially-- they're not-- they're not gunning for a higher unemployment rate. They've got an unemployment rate about a higher than where it is right now in their dots plots and their economic forecasts.

But what Powell and pretty much every member of the Fed has been very clear about is they want to see a significant dent to labor market demand, sort of crush job openings without causing a significant increase in the unemployment rate. Now, we are starting to see some pretty sizable layoffs. Interestingly, they are larger companies and they're more on the goods side of the economy, where you're still seeing hiring on the services side of the economy.

What it should have the effect of doing is continuing to bring down measures of wage growth that are done with averages, like average hourly earnings because you're now increasingly taking larger wage jobs out of the mix. And the services areas that are hiring, leisure and hospitality as an example, tend to be on the lower end of the wage spectrum.

So just-- that's the way the average works. You know, you take some of the larger numbers out, it's gonna bring it down. That may be some false hope or maybe actual justified hope on the inflation side. But it's not necessarily a great sign for the economy more broadly.

BRAD SMITH: Within kind of the energy equation that we've been tracking last year in 2022 and then even further into 2023 as well. It still continues to be one of the preferred players out there on the Street. Within the GOP House vote that's scheduled for this week on an SPR bill, it's particularly being monitored because this is tied to perhaps the drawdown in 2022, efforts to refill this year as well. Is there any broader economic impact that you anticipate from that if it does go through?

LIZ ANN SONDERS: I don't know if there's broader economic impact. It certainly is a tricky situation when you're trying to replenish what you took out at prices that are not necessarily beneficial. And that, of course, is tied in part to China's re-opening after the lengthy period of lockdown. So I do think from a demand perspective and whether ultimately the price is right for replenishing those stockpiles, a lot has to do with the trajectory of China on the demand side for oil.

JULIE HYMAN: Liz Ann, finally, as we look out here to 2023, is there one sort of message that you want to impart to investors more than any other to help them make money this year? Is there one theme that you really have high conviction on?

LIZ ANN SONDERS: So we have the return of the risk-free rate courtesy of the aggressive Fed cycle. And that is reconnecting fundamentals to prices. It means there's price discovery again.

One of our big themes has been taking a factor-based approach and focusing on factors that represent what's dear or missing in the market, so strong free cash flow, strength of balance sheet, positive earnings revisions, pricing power. But it's also been an environment where active is having its best year relative to passive in a very extended period of time.

And I think that, in large part, is to the benefit of investors, to the benefit of stock pickers. I just think for now, you don't want to fall into the trap of going way down the quality spectrum into some of the meme stocks. Stay with those quality-oriented factors. But apply that screening across the spectrum of sectors, as well as cap ranges, and even growth and value from an index perspective.

BRIAN SOZZI: Charles Schwab Chief Investment Strategist Liz Ann Sonders, always a treat to get some time with you. We'll talk to you soon.

LIZ ANN SONDERS: Thanks very much.